Global milk crisis - no easy solution in sight

Milk prices at the farmgate are among the most volatile prices in the world. They are more volatile than any other farm product and the price volatility associated with milk production is increasing.

In fact, this is not a new thing: milk prices were very volatile before governments around the world started to influence dairy markets. Government stepped in, the market stabilized, governments stepped out and milk price volatility has returned.

In the short run family farmers are likely to try and maintain cash flow by delivering more milk to compensate for reduced prices.

Economists ofen talk about the market that keeps thing in balance by itself, but in the real world the situation is not so perfect as economy books suggest. Proponents of free trade saw that de-regulation in dairy will lead to lower consumer prices but facts do not support this view.

In the UK, Australia, and the EU de-regulation finds lower producer prices that are not reflected at retail.

This is not just a short term phenomena: with a decade of de-regulation, both Australia and New Zealand have seen price rises for dairy products at the consumer level in excess of those in regulated Canada.

The growing disconnect between producer and consumer prices has been news in the dairy community for some time and is known to most economists as asymmetric pricing.

Asymmetric pricing describes the observed behaviour that prices at retail rise quickly when producer prices rise but respond only sluggishly to drops in producer price.

U.S. support prices at one time acted as the de facto world support price. This situation changed in the early 90’s when U.S. policy makers decided to move away from price support and leave producer milk prices to the market.

Since then the U.S. and the world have seen increasingly volatile milk prices and a scramble to come up with policies to support producer incomes during periods of low prices.

And indeed, the observed behavior is visible around the world and the world - and the milk production problems - is connected in many ways.

India’s milk production rose by 19 percent in the last three years thanks to government efforts to increase productivity. The consequence? Even more milk on the world market.

New Zealand's farmers are in a trouble because the Russian market is closed and many closed their businesses. That, in turn, means less milk which means less frozen cream that goes to France - and therefore there is a shortage of butter in France.

And you need a lot of milk for butter, a lot: 100 liters of milk for a mere 4.5 kilos of butter.

Of course, French farmers are not patriotic when it comes down to business and they are selling their milk on other market where the prices are higher. The result: more milk in other markets and that creates problems for foreign farmers.

After Russia and Ukraine start a battle over Crimea, the EU started the trade war and Russia answered quickly: the country imposed import bans that prevented Western dairy products. European farmers found other markets - but that hit Australia because Europeans took their main markets.

Add to that a "brilliant" move from 2015 when the EU’s changed its milk quota system that - instead of helping - created the situation when everybody is trying to establish their own system and we got a situation closely related to the chaos.

China, as a huge market for milk and dairy products, is the natural market for all milk exporters, especially those nearby such as New Zealand.

But China is also a market that goes up and down: where there is no milk the state will allow increased import. When the state concludes that domestic farmers are in danger it will impose trade restrictions. So, the situation can change quickly.

The point is, countries tend to analyse their own dairy problem without thinking globally, or they are thinking too narrow. The milk crisis is as global as it can be and only with an action that includes all the main producers and buyers the situation can be solved.

But, in today's highly competitive world it is hard to see a bright situation for world milk producers.

BIOGRAPHY Jeff Butcher is a British pig farmer with more than 25 years in the business. He closely follows world agriculture and loves to work with people being happy when he finds time to work on farmers markets, educating people about meat, mainly pork.